The present invention relates to a method and system for computing mortgage interest rates and mortgage guaranty insurance premiums associated with a financial product such as a mortgage loan. More specifically, the present invention relates to a method and system for reducing the mortgage interest rate and mortgage guaranty insurance premiums associated with the mortgage loan by financing discount points into the mortgage loan.
Private mortgage guaranty insurance (xe2x80x9cPMIxe2x80x9d) is insurance that protects the lender (e.g., the mortgagor) in case of default by the borrower (e.g., the mortgagee). Typically, the lender can purchase mortgage guaranty insurance for a loan with a loan-to-value (xe2x80x9cLTVxe2x80x9d) up to 100% or more. However, some states restrict LTV to a 97% maximum. LTV is the percentage of the loan in relation to the value of the property. The value is typically the lesser of the sales price, appraised value, or broker price opinion of the related property. For example, assume that the value and purchase price of a house is $111,111 and borrower wishes to take out a $100,000 mortgage loan. In this scenario, the LTV is 90%. That is, 90% of $111,111 is the $100,000 mortgage loan.
Generally speaking, all mortgages are originated in the primary market. Mortgage guaranty insurance helps maintain liquidity in the secondary market. Investors, such as Fannie Mae, Freddie Mac, banks, etc., require xe2x80x9cinvestment-qualityxe2x80x9d mortgages. Private mortgage guaranty insurance is one method for making the loans xe2x80x9cinvestment-quality.xe2x80x9d For example, Fannie Mae and Freddie Mac require mortgage guaranty insurance on all low down payment loans (loans with LTVs above 80%). Once a mortgage originates in the primary market, such mortgage may be bought, sold, and traded to other lenders, government agencies, or investors in the secondary market.
FIG. 1 is a flow chart summarizing a conventional mortgage finance system. In step 1 of FIG. 1, a lender, such as a savings bank, provides a mortgage loan to a home buyer (the borrower). In step 2, the lender may sell the mortgage, alone or packaged with other mortgages it owns, to an investor such as Fannie Mae or Freddie Mac. In step 3, the investor typically packages the mortgage(s) as securities and sells them to other investors or holds the mortgage(s) or mortgage-backed securities as part of its portfolio. In step 4, the lender uses the capital gained from the secondary market, i.e., the investors, to offer more loans.
Mortgage rates and mortgage guaranty insurance premiums are determined by a number of factors, such as LTV, debt-to-income and other borrower ratios, credit score, and a number of additional variables.
Borrowers, as well as mortgage sellers, builders, and relocating employers, typically have an option to pay a xe2x80x9cbuydownxe2x80x9d to lower their interest rate. A conventional buydown is an up-front payment of cash for a reduction, over time, in the mortgage interest rate. In addition, there are different types of buydowns: temporary and permanent. An example of a temporary buydown is a 3-2-1 buydown that reduces the interest rate on a loan by 3% in the first year, 2% in the second year and 1% in the third year. In the fourth year, the interest rate on the loan returns to the market interest rate. Generally, either the borrower, mortgage seller, builder, or relocating employer will pay for the temporary buydown.
In a permanent buydown, the interest rate on the loan is bought down permanently for the life of the loan. Generally, the borrower pays for the buydown by either paying an up-front cash payment at closing, or financing xe2x80x9cdiscount pointsxe2x80x9d into their loan amount. Each discount point typically costs the borrower 1% of the loan amount and lowers the mortgage rate from 0.2 to 0.33% depending on the lender, length of loan, borrower""s credit, and other factors.
Conventionally, the cost of the discount points is added to the mortgage loan amount. For example, a $100,000 mortgage loan with six discount points on a $111,111 purchase price, would accrue a new mortgage loan amount of $106,000 and an LTV of 95.4%. That is, 95.4% of $111,111 is the $106,000 new mortgage loan. Thus, the LTV with six points increases substantially from the 90% LTV without any points. Since mortgage guaranty insurance premiums are based heavily on LTV percentage, an LTV of 95.4%, as opposed to an LTV of 90%, would cost the borrower significantly higher mortgage guaranty insurance premiums (PMI).
The present invention is directed to a method for reducing the mortgage guaranty insurance premium of a mortgage (fixed or adjustable rate) or piggyback loan having. Illustratively, an original loan-to-value (LTV) ratio of the loan is determined. The original LTV is the ratio of the amount of the loan to a value of the associated property. For example, the value may be the lesser of a sales price, appraisal, and broker price opinion of the associated property.
A cost of at least one discount point (the buydown) is added to the amount of the loan to reduce the interest rate of said loan. For example, the cost of each discount point typically equals one percent of the amount of the loan. Note that the lender determines the amount that each discount point will reduce the interest rate. For example, some lenders may reduce the interest rate by 0.20 percent for each discount point purchased, while other lenders may reduce the interest rate by 0.33 percent.
Next, the mortgage guaranty insurance premium is determined based on the original LTV. In other words, it is determined independent of the cost of the buydown.
In a further embodiment, a gross LTV ratio of the loan is determined. The gross LTV is the ratio of the added cost of the discount points and the amount of the loan to the value of the associated property.
In an additional embodiment, basis points based on the original LTV are determined, such that the insurance premium is further determined based on the amount of determined basis points. The basis points may be determined based on at least one of the following factors: the original LTV; a coverage amount of the insurance; the borrower""s debt-to-income ratio; and the credit of the borrower. Note that dozens of other factors may also be used as well.
As an aspect of the present invention, some or all of the steps in the inventive method may be performed by a computerized system.
It is an object of the invention to overcome the deficiencies of the prior art by permitting the borrower to reduce the mortgage rate on a mortgage loan by financing discount points, without increasing the mortgage guaranty insurance premium above the original LTV rate.
It is a further object of the invention to reduce the mortgage guaranty insurance premium when adding the cost of a buydown, such as discount points, to the mortgage loan.
As an advantage of the invention, the financial product and method reduces the minimum income requirement of a borrower.
As an additional advantage, the financial product and method lowers the monthly premium payment of a borrower.
As a further advantage, the financial product and method eliminates the necessity for up-front cash from the borrower at the property closing to cover the buydown cost.
As another advantage, the inventive financial product and method reduces the likelihood of borrowers refinancing their mortgages when rates trend down, since discount points are financed into the original mortgage.
As yet an additional advantage, the inventive financial product and method provides reduced interest rates for enhancing loan performance for lenders and investors.
As yet a further advantage, under the inventive financial product and method, borrowers will qualify for larger loans providing additional profits for lenders and investors.
Such objects and advantages listed above are merely illustrative and not exhaustive. Further, these and other features and advantages of the present invention will become more apparent from the accompanying drawings and the following detailed description.